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6/01 cJCIRC/DateDue.p65-p.15

 

STRATEGIC POSITIONING OF THE MICHIGAN
VEGETABLE INDUSTRY '

By
Meera Manojkumar

PLAN B RESEARCH PAPER

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF SCIENCE
Department of Agricultural Economics

2002

ABSTRACT

The Michigan vegetable industry has witnessed several challenges in the
past few years. The firture of the industry remains uncertain too. This strategic
positioning study aims at identifying the strategic issues faced by the industry and
developing strategies to face the uncertain future. Strategic Analysis and Scenario
Analysis are the two techniques that have been used in this study. Through
Strategic Analysis, the inability to offer year round supply, the need for
differentiation and increasing regulations have been identified as the critical
strategic issues that need to be addressed to ensure a successful future for the
industry. The nature of increasing regulatory pressure, global sourcing and supply
activities, urban sprawl, changing consumer trends, changes in the world
economy, retailer consolidation and technological changes were identified as the
seven fundamental uncertainties likely to impact the Michigan vegetable industry.
Three possible future scenarios--survival of the few, no surprises, and renewal
and growth-~were developed, based on the plausible combinations of these
uncertain forces. Competitive strategies have been recommended for dealing with
uncertainty and for addressing the critical strategic issues. Some of the strategies
that have been recommended are: (1) formation of strategic alliances with
domestic/ global suppliers from other vegetable producing regions to enable the
industry to provide an array of products throughout the year, (2) adoption of
effective farm strategies, such as, HACCP, in day-to-day operations to facilitate
the industry’s ability to meet varying private standards, and (3) industry

coordinated marketing efforts to promote products.

Acknowledgments

I would like to express my appreciation to all those who helped me during
this program. I am extremely grateful to Dr. Christopher Peterson, my major
professor and advisor for his constant guidance and support. His timely feedback
and constructive criticisms enabled me to improve my work tremendously. I am
also thankful to my committee members Dr.Weatherspoon and Dr.Hausbeck. I
owe my gratitude to Mr. Tom Kalchik, of the MSU extension team, who was
always ready to provide information about the industry. My Spartan friends were
a constant source of moral support for me and I thank them profusely.

I am indebted to my parents for their support and encouragement and am
glad that I was finally able to fulfill their dreams. My special thanks to my
husband Manoj, without whose initiative I would never have been able to take up
this task. Last but not the least, my son Abhinav and his smiles were a constant
motivating factor that enabled me to complete this research on time. Many a time
during the entire program, I had come across difficult situations; the faith in Lord
Almighty always gave me the strength to overcome the same. My thanks to thee,

“ O Lord”.

TABLE OF CONTENTS

 

LIST OF EXHIBITS

iv

 

 

CHAPTER 1: Introduction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.1 Objectives of the paper 1
1.2 Research Methodology 2
1.2.1 Theory and Concepts reviewed 2
1.2.2 Data Sources 2
1.2.3 Framework of the analysis 3
1.3 Organization of the paper 4
CHAPTER 2:0verview of the Vegetable industry

2.1 Global and the US domestic trends 5
2.2 Product categories for vegetables 8
2.3 The Michigan vegetable industry 9
2.4 Supply chain -The changing dynamics 13
2.4.1 Demand for fresh produce 14
2.4.2 Mind Set of retailers 14
2.4.3 Retail Dynamics in the US 15
2.4.4 Consolidation 16
2.4.5 Vegetable trade expansion 16
2.5.Chapter Summary 17
CHAPTER 3: Theoretical Framework For The Study

3.1 Competitive analysis of industries 24
3.2 Strategic management concepts 25
3.3 Strategic Planning techniques for commodity industries 27
3.4 Scenario Analysis 28
3.5 Chapter Summary 29
CHAPTER 4: Strategic analysis of the MI vegetable industry

4.1 Performance analysis of the Michigan vegetable industry 31
4.2 SWOT Analysis 33
4.3 Strategic issue Synthesis 43
4.3.1 Core Competencies and Competitive advantages 43
4.3.2 Change Grid 44
4.3.3 Critical Strategic issues 45
4.4 Chapter Summary 46

 

ii

 

 

CHAPTER 5: Industry scenarios and competitive strategy under
uncertainty

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.1 Fundamental Uncertainties about Miclgan vegetable industry 50
5.2 Possible Scenarios under uncertainty 55
5.3 Competitive Strategies under uncertainty-- 6]
5.3.1 Strategy for scenario 1 61
5.3.2 Strategy for scenario 2 63
5.3.3 Strategy for scenario 3 63
5.3.4 Strategy under uncertainty 64
5.4 Chapter summary 68
CHAPTER 6: Conclusion

6.1 Framework revisited 70
6.2 Key findings 72
6.2.1 Strategic Analysis of the industry 72
6.2.2 Scenario Analysis 73
6.3 Recommended strategies for future 74
6.4 Next Steps 75
6.5 Concluding Thoughts 75
BIBLIOGRAPHY 77

 

 

iii

 

LIST OF EXHIBITS

 

Data on the US Vegetable Industry

 

 

 

 

 

 

 

 

 

Exhibit 2.1: 19

Exhibit 2.2: Production of fresh vegetables in Michigan 20

Exhibit 2.3: Production of processed vegetables in Michigan 20

Exhibit 2.4: Comparison of harvested acreage of Processed vs Fresh 21
vegetables in Michigan

Exhibit 2.5: Harvested acreage of processed vegetables in Michigan 22

Exhibit 2.6: Harvested acreage of fresh vegetables in Michigan 22

Exhibit 2.7: Supply Chain in the Michigan Vegetable Industry 23

Exhibit 4.1: Performance Assessment of the Michigan vegetable 48
Industry

Exhibit 4.2: SWOT Analysis of the Michigan vegetable industry 49

 

 

iv

 

CHAPTER 1
Introduction
The vegetable industry has witnessed many dynamic changes in the past
few years. These include changing consumer preferences, government
regulations, technological developments, increased competitive pressures and
greater customer quality requirements (Ricks, 1995). These are further
accentuated with globalization. Compelling pressures in the form of demanding
phytosanitary and food safety standards have also affected this industry. In order
to effectively deal with these changes, it becomes imperative to improve industry
level performance and competitiveness. This strategic positioning study of the
Michigan vegetable industry aims to provide needed background analysis and
understanding for development of a broad set of industry-level strategies.
1.1 Objectives of the paper
In recent years, the Michigan vegetable industry has been facing severe

challenges. The future of the industry remains uncertain as well. These challenges
require that the industry players, which include the growers, processors, shippers
and packers, critically understand the strategic issues present and develop
effective strategies to face the uncertain future. Hence the specific objectives of
this paper are twofold.

0 To identify and analyze the strategic issues of the Michigan vegetable

industry.
0 To more specifically analyze and develop strategies for facing

uncertainty.

1.2 Research Methodology

This research paper is a subsector planning study of the Michigan
vegetable industry. The framework for this study was developed after reviewing
the theoretical concepts and ideas from several related disciplines.
1.2.1 Theory and concepts reviewed

Porter’s five-forces competitive framework was reviewed in order to
understand the forces that influence the competition and ultimately the profit
potential in the industry. The strategic management framework for entrepreneurial
agribusinesses by Peterson (1996) and the strategic management model by Pearce
and Robinson were used to structure the analysis of strategy formulation and
implementation. Strategic planning techniques developed by Ricks and Woods
(1996) helped incorporate strategic planning concepts in the broader context of a
regional commodity industry. To identify the techniques for managing
uncertainty, materials on scenario analysis by Schoemaker and Peterson were
utilized. Based on the concepts and articles reviewed, a framework for the
strategic positioning study on the vegetable industry in Michigan was developed.
1.2.2 Data sources

Data and Information about the Michigan vegetable industry was obtained
from secondary sources: key industry informants and the author’s participant
observation of the 2002 Michigan Produce Marketing Conference and a scenario
analysis workshop conducted by Michigan State University Extension.

The Michigan produce marketing conference held at Grand Rapids helped

gain insight into various aspects of the Michigan produce industry including

issues such as the supply chain, food safety and alliances. The information for the
scenario analysis section has been heavily drawn from a scenario analysis
workshop titled “Managing Uncertainty”. This workshOp helped gain insight into
the future of the Michigan Vegetable industry. Participants included Dr. Peterson
(workshop facilitator), members of the Vegetable Area of Expertise team of
Michigan State University Extension, Michigan vegetable producers and channel
members. The goal of the workshop was to have participants construct future
scenarios for the industry.

1.2.3 Framework of the analysis

Review of the theoretical concepts justified the need for strategic analysis
in order to identify the critical strategic issues, and scenario analysis to help
manage uncertainty in the future. The specific approach used to conduct each of
these analyses is now presented.

Strategic analysis: The first stage was the performance assessment of the
industry, and the goal was to identify whether the actual performance warranted
the need for strategic analysis and planning. Subsequently, SWOT (Strengths,
Weaknesses, Opportunities and Threats) analysis of the industry was carried out.
Drawing on the prior analysis and putting the overall industry situation in
perspective, the core competencies and competitive advantages of the industry
were identified. The industry’s current position was also located on a SWOT grid,
and the strategic issues that need to be addressed for a successful future were

articulated.

Scenario analysis: The participants of the scenario analysis workshop
identified the trends and forces that would impact the future of the industry.
Future scenarios were envisioned based on the plausible combinations of the
uncertain forces. Strategies were developed for each scenario and the ones
consistent across the different scenarios were identified as the means for
managing the uncertain future.

1.3 Organization of the paper

The remainder of the paper is organized as follows. The second chapter
gives an overview of the global and Michigan vegetable industries, the general
industry trends and the changing dynamics in the vegetable supply chain. The
goal of this chapter is to acquaint the readers with the industry situation before
entering into the details. Theoretical concepts pertinent to the study are reviewed
in the third chapter. This review helps in justifying the analytical procedure
adopted in the study. In the fourth chapter, the critical strategic issues of the
Michigan vegetable industry are identified using the strategic analysis techniques.
The future scenarios of the Michigan vegetable industry and the competitive
strategies to manage uncertainty in the future are presented in the fifth chapter.
The sixth chapter summarizes the entire paper and draws relevant conclusions

from the work.

CHAPTER 2
Overview of the Vegetable industry

The purpose of this chapter is to provide an overview of the vegetable
industry. This chapter is organized in the following manner. The first section
includes background information on the global and the U.S domestic vegetable
trade and general industry trends. The second section gives a brief description of
the various product categories in the vegetable industry. In the third section, a
broad overview of the Michigan vegetable industry is presented. The changing
dynamics of the supply chain in the vegetable industry have been elaborated in
the fourth section.
2.1 Global and U.S domestic trends

Globalization has increased the range and availability of foods in different
parts of the world. Instead of living on canned vegetables in winter, U.S.
consumers can choose fresh produce from Chile or Guatemala any time of the
year. Food consumption patterns have also changed (Regmi, 2001). For example,
in the U.S, the consumption of red meat has declined significantly in the past 30
years while the consumption of poultry has increased. Changes in the
consumption pattern of one region affects the production and trade patterns in
other countries. The composition of world agricultural trade has also undergone
dramatic changes. As a result, it is observed that fruits and vegetables as a group
are one of the largest traded commodity groups in global agriculture. In 2000, the
total world agricultural exports were US $275 billion, and fruits and vegetables as

a group accounted for a 14.5% share of these exports (ERS, USDA, 2002).

An increase in the demand and supply of fresh produce has led to an
increase in the global trade in these commodities. Global trade of fresh fruits and
vegetables are valued to be more than US $40 billion. The United States and the
EU are major producers and traders of fresh produce. As a single country, the
United States is the largest exporter and importer of fresh produce (fruits and
vegetables combined) with a trade deficit of about US $1 billion (Cook, 1999).
The U.S. share of global hit and vegetable exports reached a new record level of
15.7% in 2000. When the global trade in vegetables is considered, U.S had
imported vegetables worth $4.128 billion and exported vegetables worth $3.314
billion in 2000 (refer to Exhibit 2.1). When only fi'esh vegetables are considered,
the total value of vegetables produced in the U.S in 2000 was worth $8.640
billion, imports had increased by 4.9% and exports had increased by 14% (refer to
Exhibit 2.1).

In order to increase the availability of fresh produce throughout the year in
the northern hemisphere, there has been an increase in exports fi'om the countries
in the southern hemisphere to the ones in the north (Zuurbier, 1999). There has
also been a supplier country diversification. In the 1980’s Chile, New Zealand and
Mexico were the new players, and in the 1990’s China, Brazil, Peru and
Guatemala have emerged as fresh produce suppliers (Reardon, 2002).

The demand for vegetables has increased for many reasons. Vegetable
consumption is positively correlated with income levels, and their supply is
highest in the high-income countries (Pollack, 2001). In the U.S, the per capita

consumption of vegetables increased from 423 pounds in 1992 to 469 pounds in

2000 (ERS, USDA April and November 2001). A wider variety of vegetables are
available for the population due to the increase in global trade. The availability of
convenient forms, e.g., fresh cut and minimally processed vegetables, has also
increased the demand for vegetables. A rise in the proportion of immigrants from
various parts of the globe in the U.S has resulted in the increasing popularity in
ethnic diets typically high in fresh vegetables. The increasing health
consciousness by the aging baby boomers has also boosted the demand for fresh
vegetables.

With the increase in income level in developing countries, consumers are
shifting from starchy diets to diets richer in animal proteins, vegetables and more
value added produce throughout the year (Cook, 1999). It is hence expected that
the global scenario for consumption would be similar to the U.S.

Global trade has increased the market opportunities for firms, especially in
the rest of the world, which is in contrast to the slow growth mature markets of
the U.S and Europe. The increase in global trade has also resulted in several
concerns. Consumers show an increased interest in features, such as, nutritional
content, genetic composition and pesticide residues (Epperson, et a1, 1999). The
fear of health hazards from the use of pesticides and possible food contamination
issues has resulted in demanding phytosanitary and food safety standards
throughout the world.

To summarize, it is clear that factors such as availability, affordability,
convenience and health concerns have influenced the consumption of vegetables.

The consumers have access to a wider array of vegetables due to global trade. In

addition to this, consumer concerns regarding food safety have also increased.
These concerns have in turn driven the need for increased use of Phytosanitary
measures by the producers. In order to increase the competitiveness of their
produce in the global market, it becomes crucial for producers to adopt good
agricultural practices and good management practices.

2.2 Product Categories in Vegetablesl

Increasing health consciousness and the growing demand for convenience
products have lead to an increase in the product categories for vegetables. Buyers
tend to prefer suppliers who can offer a wide array of product lines, hence there is
a growing trend among shipper-growers to offer diversified mixed vegetables
with many product lines in different product categories.

Vegetables can be broadly classified as processed and flesh. Processed
vegetables include canned, frozen and pickled vegetables. Fresh vegetables can be
further classified as commodities, value added and fresh cut (fresh processed)
based on the degree of processing that is undertaken. The demand for fresh ready-
to-eat vegetables has spurred the need for some processing even in the fresh
category.

Commodities are the least differentiated products, and they may or may
not be branded. Even if they are branded, the brands are mostly not recognized by
the customers. The commodities require a minimal amount of processing, and
they are generally sold in bulk as individual items or simple combinations. For
example, a mixture that has various types of whole lettuce is categorized as a

commodity.

 

' This discussion draws heavily on an article by Glaser, Thomson and Handy (2001).

While the value added fresh products require greater processing as
compared to the commodity items, they require less processing as compared to
the fresh cut products. The processing operations for the value added products can
be performed in modified packing sheds with less expensive processing
equipment. The value added products are bagged in simple cello packs, and they
may or may not have universal product codes (UPC). An example is useful in
making the distinction between the commodity and the value added categories,
Broccoli crowns or leaf lettuce sold in bulk are considered commodity products,
while broccoli florets that are sold as washed ready-to-cook items in 16-ounce
packages are considered as value added products.

Fresh cut vegetables, which include bagged salads, are highly
differentiated products that are usually branded and possess a UPC code. They are
more like packaged goods than produce. Processing plants with substantial capital
investment of plant and machinery are required for this purpose. Sophisticated
packaging techniques have to be used to pack the bagged salads as their
transpiration and respiration rates have to be maintained to extend their shelf life.
Specific procedures are used to maintain the cold chain from processing to the
retail display level. Asset specificity and the high cost of these facilities leads to
significant barriers to entry in this segment.

2.3 The Michigan vegetable industry2
Agriculture is Michigan’s second largest industry, with an annual

contribution of about $37 billion to the State’s economy. The state leads the

 

2 Statistics pertaining to Michigan agriculture was obtained from Michigan Agricultural Statistics
2000-2001.

nation in the production of 10 crops and ranks fifth or higher in 32 cr0p categories
(Michigan Department of Agriculture). .

As a group, vegetables constitute the fourth major commodity group in
Michigan agriculture. The Michigan vegetable industry includes the vegetable
growers, processors and shippers as well as the other industry organizations
associated with these groups. Vegetables are cultivated for fresh and processing
markets in Michigan.

The majority of the vegetables are grown in the southern half of the Lower
Peninsula of the state and the production systems range from conventional to
organic. Some growers have small farms while some manage hundreds of acres.
The fresh market produce grown in Michigan is shipped to major markets
throughout the nation, and the processors both inside and outside the state use the
vegetables cultivated for processing.

In 2000, nationally, Michigan was ranked sixth and seventh in the
processed vegetables and the fresh vegetables sales respectively. Michigan
growers produced 815,230 tons of fresh and processed vegetables with a total
value of US $236 million. There has been an increasing trend in vegetable
production (in the fresh and processed categories) in the state since 1998 (Exhibits
2.2 and 2.3).

There was not much variation in the harvested acreage for vegetables
during the period 1996-2000 @xhibit 2.4). Though there was a 4 % decrease in
the fresh vegetable acreage in 2000, for comparable crops, the acreage has

increased by 20 % when all crops were considered. It is also observed that despite

10

a 2% decrease in the harvested acreage under processed vegetables, their
production had increased by 1% in 2000.

Cucumbers (processing), celery, asparagus, snap beans (processing),
carrots (fresh and processed), tomatoes (processing), pumpkins and squash are
some of the important vegetables cultivated in Michigan. The state leads the
country in pickle cucumber production.

Though Michigan was ranked third and fourth in fresh carrot and
processed carrot production respectively in 2000, the harvested acreage (Exhibits
2.5 and 2.6) and the production had declined from the previous year. Carrots are
the second highest volume fiesh market vegetable grown in Michigan.
Traditionally, the Michigan growers have produced large carrots (carrots packed
in 3-pound cello). However, there has been a shift in the carrot consumption
pattern and consumers now prefer baby carrots as compared to the large carrots.
Most of the Michigan fresh market producers have not yet shifted to value added
products (i.e., from large carrots to baby carrots). Hence, in contrast to the
increasing trend in the per capita consumption of carrots in the U.S, there has
been a declining trend in the production of carrots in Michigan.

The state is ranked fourth in the country in tomato (processing)
production. While the processing tomato acreage has shown a declining trend, the
fresh tomato acreage has fluctuated around 2600 acres (Exhibits 2.5 and 2.6).
Heinz, Hunts and Campbell moved their processing facilities out of Michigan,

which affected the tomato processing in the state.

11

Though the Asparagus season is short in Michigan, the state ranks third in
asparagus production nationally. In 2000, the total production of flesh asparagus
increased by 20%, while the total production of processed asparagus decreased by
10 % as compared to the previous year (Exhibits 2.5 and 2.6). Michigan’s
asparagus is mostly grown near the Lake Michigan shoreline where the moderate
temperatures and loamy soils make for excellent production conditions. The
Michigan asparagus growers have traditionally focused on the processing
industry, but future growth is expected to be in the flesh segment. The flesh-
picked, tender Michigan asparagus is an ideal product for the fresh market
(Michigan Department of Agriculture). The Asparagus growers hope to reap
significant benefits in the future by adopting a proper product positioning strategy
(Project GREEN, 2001).

Michigan ranks second in the nation in celery production. Since 1996,
both the celery acreage and the production have shown a declining trend.
However, in 2000 there was an 11% increase in the total production of celery
flom the previous year. The Michigan celery growers face stiff competition flom
their counterparts in California and Florida. In order to remain competitive, the
celery growers will have to refine their pest management practices and produce
quality products (Wysocki and Peterson, 1997).

Although the fresh vegetable segment has been growing at a faster rate
than the processed vegetables globally, the shift flom processed to flesh
vegetables has been relatively slow in Michigan due to a variety of reasons.

Market outlets are different for flesh produce, inflastructure facilities required for

12

flesh produce are different and the initial costs to growers are higher than their
returns. It has therefore been rather difficult for a large proportion of Michigan
vegetable growers to make the shift.

Many forces have impacted the vegetable growers in Michigan in recent
years. Consumers are demanding high quality vegetables. The government
regulations are increasing the costs of various inputs. Food Quality Protection Act
regulations and the cost of pest management practices have increased the
concerns for growers. The development of resistance by pests (especially
Phytopthora) towards chemical fungicides is also posing a severe challenge to the
growers.

Michigan vegetable growers are in a highly competitive environment. At
the national level, they face severe competition flom California shippers. They
also face stiff competition flom the vegetable growers in Canada and flom other
global suppliers.

2.4 Supply chain —The changing dynamics

Vegetables are marketed in the Michigan vegetable industry through two
main marketing channels, flesh and processing (as illustrated in Exhibit 2.7), with
several distinct vertical stages. The flesh marketing channel is used for vegetables
that are sold in flesh form or minimally processed form to consumers. The flesh
market provides the growers with higher returns and also requires a higher set of
quality characteristics, e. g., finish and appearance. The processing market
provides a large volume alternative for vegetables including those that do not

meet the flesh market requirements.

13

In the vegetable industry, growers and shippers may be different or the
same. Shippers market their produce to a range of customers (Glaser et a1, 2001 ).
Their customers include the processors, retail supermarkets, food service firms,
mass merchandise stores (large stores that also have grocery departments),
wholesale markets, brokers (agents that negotiate transactions between buyers and
sellers without taking title to the merchandise) and exporters. Shippers either sell
to a firll range of customers or specialize with a few. Some growers sell their
produce directly at farmer’s markets or at roadside stands.

2.4.1 Demand for fresh produce

The demand for flesh produce varies with different customers (Glaser et
a1, 2001). At the retail and the wholesale level, the demand for flesh produce can
vary substantially every week. There are some products that are available
throughout the year with the same consistent quality, and there are other products
that are seasonal. Since the demand for seasonal product varies and their supply
also fluctuates, their prices and volumes are volatile. Due to fixed menus and
prices, the demand for flesh produce by the foodservice firms is fairly consistent.
2.4.2 Mind Set of retailers

The vegetable suppliers have to deal with retailers who have different
viewpoints. Some retailers (Wal-Mart) believe that there can be an increase in
sales by having low price programs, while another set of retailers believe that
value added services generate additional sales. This latter set of retailers believe
that convenient forms, extended shelf life and other similar services satisfy

customer needs; and, hence even with an increase in the selling price per unit of

14

produce, they would still be able to maintain a competitive image. It becomes
imperative that shipper growers understand the diverse requirements of the
wholesaler/retailer while segmenting their products. This would enable them to
provide an appropriate mixture of attributes i.e., price, quality and value added
services (Epperson et al, 1999).

2.4.3 Retail Dynamics in the U.S.3

The retail dynamics for the produce industry have changed since the
1990’s. The supply chain issues faced by the produce industry today are a lot
different flom what it was earlier. In the 1990’s there was fiiction between the
buyers and sellers, and today there is an increasingly cooperative relationship
among buyers and sellers.

The space allocated to the produce department in grocery stores has
increased as contribution to the total profits flom the sale of flesh produce in the
retail stores have also increased.

Technological advancements have brought about changes in procurement
methods. Retailers prefer precise inventory management. Suppliers are sharing
the responsibility of marketing services, such as, in store promotion and point of
purchase materials. Retailers are thus able to lower their marketing costs and
improve the in-store marketing effectiveness. Retailers charge for access to shelf
space, and there is an increase in private label products.

The shipper growers are segmenting their customer base. They have had to

move flom the sale of commodities to the sale of bundles of commodities and

 

3 Section 2.4.3 is based on a talk given by McLaughlin in 2002

15

services. There has been a trend towards contracts due to changes in the
procurement process.
2.4.4 Consolidation

Supermarket chains have been consolidating which in turn reduces the
number of buyers. In addition to retail consolidation, the top 10 integrated
wholesalers accounted for 60% of the total 1998 food sales in the U.S.
Consolidation has led to an increase in consistent demand for good quality
produce. The retailers (buyers) try to introduce procurement methods in order to
manage their supply chain efficiently. They are also interested in obtaining high
value produce at lower cost. Through consolidation, retailers are able to lower the
unit cost of goods by negotiating lower wholesale prices. They then try to have
preferred suppliers in order to solve their supply problems.

In order to serve their large buyers, the shippers too are moving towards
consolidation. This enables the shippers to meet their buyer demands more
efficiently and to provide continuous consistent supply of good quality produce
throughout the year at lower cost. A further result of consolidation is the
emergence of multi-location joint ventures driven by supply chain management
(Cook, 1999).

2.4.5 Vegetable trade expansion

Trade liberalization has affected the vegetable trade. Strategic alliances
and joint ventures have allowed the medium and small vegetable firms to go
global and have also enabled nontraditional firms, e. g., the grower/shippers, to

enter the international trade (Cook, 1999). The multinational grower/shippers and

16

multinational firms (e.g., Green Giant) have invested in land and production
facilities in Mexico, Chile and elsewhere to be more competitive in the global
market (Reardon, 2002). The multinational firms who were already present in the
global market are trying to develop global brands and have also started
diversifying their product lines. Supermarket chains have also expanded globally,
which has spurred vegetable trade internationally.

Advances in information technology have spurred the growth of trade in
flesh vegetables. Precise inventory management systems link producers, shipping
companies and large retailers. The use of controlled atmosphere technology and
remote monitoring systems in the refiigerated transportation containers has
extended the shelf life and the quality of flesh produce. Shippers are able to
deliver flesh vegetables with no substantial loss in quality to buyers who are miles
away.

To increase their competitiveness in the global market, the Michigan
producers will need to use supply and marketing information as well as
technology as efficiently as possible. Shippers who are flexible and responsive to
the growing demands in the supply chain will manage to survive.

2.5 Chapter Summary

Globalization has increased the variety and availability of vegetables throughout .
the year. Increase in the global vegetable trade has expanded market access and
has increased consolidation among retailers globally, which has in turn increased
the strategic alliances among suppliers worldwide. Advances in technology have

also influenced the supply chain activities. There have been changes in the

17

consumer demand patterns. The growth in the demand for convenience has lead to
an increase in the vegetable product categories.

Consumers also show an increasing concern for food safety issues. The
changes in the vegetable trade have impacted the Michigan vegetable industry. In
order to survive in the highly competitive global environment, the Michigan
vegetable industry will have to offer products suitable for the changing consumer

and be flexible in response to the growing demands of the supply chain.

18

Exhibit 2.1: Data on the U.S Vegetable Industry

 

 

 

 

 

 

 

 

Total Vegetables Fresh Vegetables Processed V etables
1999 2000 %Change 1999 2000 %Change 1999 2000 %Cha_ng_e_
Area 7152 6824 -4.5% 1911 1924 0.6% 1513 1450 -4.16%
harvested
(1000 acres)
Value of 13732 14298 4.12% 7548 8640 14.5% 1743 1513 -15%
production
(Smill)
Imports($mill) 3995 4128 3.32% 2171 2279 4.9% 858 762 -11%
Exports($mill) 3289 3314 0.8% 1068 1219 14% 700 687 -1.8%
Per capita 456 464 1.75% 171 176 2.9% 129 128 -0.7%
consumption
(Pounds)

 

 

 

 

 

 

 

 

 

 

Source- Vegetables and specialties situation outlook, November 2001

I

19

 

Exhibit 2.2: Production of Fresh vegetables in Michigan

 

 

r§§§é§§§ér

 

 

 

 

F—o—freeh vegetables]
1996 1997 1998 1999 2000
years
Exhibit 2.3: Production of processed vegetables in Michigan
5
8
E
g [—0— processed vegetabgl
C
O
"‘3
3
E
Q
1996 1997 1998 1999 2000
years

20

Exhibit 2.4: Comparison of Harvested acreage of
Processed vs Fresh vegetables in Michigan

acres( In 1000's)

 

1996 1997 1998 1999 2000
years

21

 

 

+Processedveg
+freshveg

 

 

Harvested acres

ICFOS

Exhibit 2.5: Harvested acres of processed vegetables by crop in Michigan

 

 

 

 

35000

30000

25000
20000 + cucumbers
snapbeans

15000

10000

5000

 

Exhibit 2.6: Harvested acres of fresh vegetables by crop in Michigan

 

8000

7000

6000 + sum beans

5000 I cabbage

carrots

4000 cucumbers

3000 +onrons
+ tomatoes

 

 

 

 

22

Exhibit 2.7

Supply Chain in the Michigan Vegetable Industry

 

 

 

 

Growers
Fresh
Processing

Processors { Shippers
Export
Wholesalers

v v /

Food + Retail Supermarkets/
Manufacturers Mass merchandise stores

\

Food service
Firms

\

Consumers

Source: Adapted from Lyford, 1998

23

Chapter 3
Theoretical framework for the study

Relevant theory and literature were reviewed in order to develop a
flamework for this subsector study on the Michigan vegetable industry. The
purpose of this chapter is to corroborate the validity of the research procedure
adopted in the study. The first section includes a review of Porter’s Competitive
Forces analysis. In the second section, strategic management concepts and
flarneworks are presented. The third section reviews the strategic planning
techniques for commodity industries. Finally, the scenario analysis technique
utilized in managing uncertainty is reviewed.

3.1 Competitive analysis of industries

Porter introduced the concept of industry environment and its impact on
strategic planning in his book Competitive Strategy. This section includes a
review of Porter’s analytical flamework in which he explains the forces that shape
competition in an industry.

The five forces that drive competition are the threat of new entrants, threat
of substitutes, bargaining power of suppliers, bargaining power of buyers and
rivalry among existing firms. These forces jointly influence the profitability of the
industry and the strongest forces become crucial flom the point of strategy
formulation.

Once the forces affecting competition in an industry and their causes are
analyzed the firm is in a position to identify its strengths and weaknesses relative

to the industry. The structural analysis thus forms the basis for formulating

24

competitive strategy. The purpose of competitive strategy for a business unit in an
industry is to find a position wherein the business unit can defend itself best under
the competitive forces or can try to influence the forces in its favor.

3.2 Strategic management concepts

Strategic management concepts and flameworks relevant to this study are
presented in this section. These concepts are usefirl in the strategic planning and
implementation process.

According to Pearce and Robinson, strategic management is a set of
decisions and actions that results in the creation and execution of plans designed
to achieve a company’s objectives. Their model views strategic management as a
process, which begins with the development or reevaluation of the company’s
mission. Subsequently, the external and the internal environment of the firm are
assessed. This is followed by the strategic choice stage. In this stage the firm
evaluates and chooses strategies that will enable them to create a sustainable
competitive advantage. The phases that follow in order are the definition of long-
term objectives, design of grand strategies, definition of short-term objectives,
design of operating strategies, implementation of the strategies, review and
evaluation. Pearce and Robinson represent one example of the standard, broadly
accepted paradigm for strategic management.

Peterson presents a strategic management flamework for firms based on
the firndamentals of several strategic management approaches. He has synthesized
the strategic management flarneworks of Pearce and Robinson, and several others.

His flamework is based on three distinct stages: challenging assumptions and

25

beliefs about a firm’s strategic position, strategy selection and strategy
implementation through short-term operations.

Challenging a firm’s assumptions and beliefs is done through a situation
analysis focused on understanding the internal state of the firm within the context
of the external environment in which it operates. The assessment of the firm’s
capabilities and constraints are included in the internal analysis. Peterson’s
change forces analysis and Porter’s competitive forces analysis are used as a basis
for the external threats and opportunities analysis. The internal and external
analysis together is popularly known as the SWOT (Strengths, weaknesses,
opportunities and threats) analysis.

Strategic issue synthesis is then built on the earlier analysis. In this portion
of the strategic process, the core competencies, competitive advantage and the
critical strategic issues are identified. Subsequently the vision and mission for the
firm are developed.

The knowledge gained flom this first stage is then used in developing
strategy for the firm. The development of a core strategy is based on a set of five
strategic choices: (1) the approach that the firm uses to create customer value and
competitive advantage, (2) the direction/size of the business that is required for
future success, (3) the scope of business activities that the firm requires, (4) the
overall role of the firm in the industry and (5) the relationship that the firm wants
to maintain with each key customer and supplier. The evaluation of the various

alternatives thus leads to the development of a complete core strategy.

26

Implementation of the core strategy is the final phase, which evolves flom
appropriately detailed action strategies and tactics. The various stages in strategic
management can also be reevaluated based on changing circumstances. The
strategic management process is thus iterative. Peterson’s flamework aids in the
development of sustainable competitive advantage for a firm.

3.3 Strategic planning techniques for commodity industries

Ricks and Woods developed strategic planning techniques in the broader
context of a regional commodity industry. Strategic planning with commodity
industries is complex and different flom strategic plamring at the firm level.
Commodity industries, such as, the vegetable industry, are comprised of many
small-sized firms along with a few medium sized and medium large firms. These
industries also involve a number of complex vertically linked industry
participants, i.e., growers, shippers, processors and other industry support
organizations who have many common interests and who are jointly impacted by
a number of key driving forces. Though the various firms in the industry compete
with each other and with other regional industries, selected key issues and
elements of common interest, such as, expanding generic demand and improving
quality standards, can be better addressed by strategic planning at the industry
level. For these certain broad aspects, which are of importance to the whole
industry, individual firm strategic planning needs to be supplemented by industry
strategic planning.

Apart flom situation analysis, components such as gap analysis,

determination of priority issues for the industry, analysis of action alternatives,

27

follow up on alternatives, impact analysis, and strategy review and reevaluation
are also included in the industry strategic planning approach.
3.4 Scenario AnalysisI

Scenario analysis is a technique used in strategic management for
managing uncertainty. According to Knight, uncertainity arises when the
probability distribution for future events cannot be estimated. The scenario
analysis method attempts to capture a whole range of possibilities, stimulating
decision makers to consider changes they might otherwise ignore.

A scenario is a story about a possible future state of the world. Scenario
analysis begins with the identification of trends that influence a business
environment. These trends are then separated into two distinct categories, one
including trends that are relatively certain and the other including trends that are
uncertain. Reliable combination of these uncertainties is subsequently used to
construct different scenarios. These scenarios should be internally consistent and
should also be plausible. Since uncertainties present today can be resolved in a
number of ways in the future, multiple scenarios are required to better understand
the shape of the future. In the following stage, strategies relevant for operating in
each different scenario are considered. Strategies relevant across different
scenarios become useful for implementation in that these strategies are the means
for managing uncertainty.

In scenario planning the joint impact of the various uncertainties that
influence the future are considered. By visualizing a wider range of possible

futures, decision makers are in a better position to take advantage of the

 

' This section draws heavily on the articles, by Peterson and by Schoemaker.

28

unexpected opportunities that will come along. This technique can include
elements that cannot be formally modeled. Hence when subjective interpretations
are required beyond purely objective analysis, scenario analysis is a better
technique.

3.5 Chapter Summary

Situation analysis helps in identifying issues that are critical both at the
firm level and at the industry level. This technique has been used in the strategic
management flamework for firm level strategic planning and also in the broader
context of commodity industries. SWOT (Strengths, Weaknesses, Opportunities
and Threats) analysis is used during the situation analysis to better understand the
internal capabilities and constraints and the external opportunities and threats in
the firm-level and in the industry-level strategic planning. Drawing on the SWOT
analysis and putting the overall situation in perspective, the core competencies,
competitive advantages and the critical strategic issues of a firm are identified in
the flarnework developed by Peterson. This stage is known as the strategic issues
synthesis.

This study is a subsector planning study of the Michigan vegetable
industry. One of the objectives of this subsector study is to identify and analyze
the critical strategic issues of the Michigan vegetable industry. The review of the
relevant theoretical concepts thus validates the use of strategic analysis, i.e.,
SWOT analysis followed by strategic issue synthesis, as the appropriate research
procedure for identifying the critical strategic issues of the Michigan vegetable

industry.

29

The second objective of this study is to specifically analyze and develOp
strategies for facing uncertainty in the future. Scenario analysis has been
identified as one of the best techniques for analyzing uncertainty. Scenario
analysis captures a whole range of possibilities in detailed alternative scenarios
that then allow the development of strategies relevant under these different
scenarios. Managers are thus better prepared to manage the uncertainties that
they face. Hence the use of this technique seems to be the most appropriate one to

achieve the second objective if the study.

30

CHAPTER 4
Strategic analysis of the Michigan vegetable industry

The goal of this chapter is to identify the critical strategic issues that the
Michigan vegetable industry must address in order to ensure a successful future.
Strategic analysis is the technique applied to achieve this goal. The chapter is
organized in the following manner. The first section includes an assessment of the
performance of the industry. A SWOT (strengths, weaknesses, opportunities and
threats) analysis of the Michigan vegetable industry is presented in the second
section. Strategic issue synthesis, which includes the core competencies,
competitive advantage, change grid and the critical strategic issues, is described in
the third section.
4.1 Performance Analysis of the Michigan vegetable industry

Performance analysis is the first step in the strategic analysis process. The
performance of the Michigan vegetable industry was assessed in the areas of
customer satisfaction, competitiveness, productivity and profitability. The
objective of the assessment was to ascertain whether the problems faced by the
vegetable industry warranted strategic analysis and planning.

The participants of the scenario analysis workshop (refer to section 1.2 for
details) evaluated the performance of the Michigan vegetable industry. (See
Exhibit 4.1). The participants rated each factor on a scale of 1 to 5. Note that the

material below includes the vieWs of the participants with additional analysis

added by the author.

31

Customer Satisfaction: The Michigan vegetable industry was given an
average rating of 3.4 for customer satisfaction. The overall ranking in vegetables
and the crop-by-crop market shares justify the average rating for customer
satisfaction. Nationally, Michigan was ranked seventh and sixth in the flesh and
processed vegetable sales, respectively. Crop-by-crop analysis reveals that
Michigan is the leading state in processed cucumber cultivation (with a market
share of 29.4%), second in the cultivation of celery (with a market share of 5.4%),
and third in asparagus (with a market share of 12.5%).

The customer satisfaction was found to be better in the processed
vegetable segment as compared to the flesh vegetables. On the whole, the
inability to provide year-round continuity in supply was one of the major reasons
for low customer satisfaction.

Competitiveness: The assessment has revealed average competitiveness
for the industry with a score of 3.3. The industry has the ability to provide a wide
range of vegetables. Michigan growers are competitive in the cultivation of
processed cucumbers, celery, asparagus and flesh carrots. Proximity to major
markets and availability of irrigation water are some of the major factors that have
enabled the Michigan vegetable industry to be competitive against the other
vegetable producing regions in the country. Nevertheless, the inability to provide
year round supply of vegetables has been a limiting factor for the industry.

Productivity: The performance assessment has revealed moderate

productivity with an average value of 3.6 for the industry. Severe pest/disease

32

attack and the development of resistance to chemical measures by the pathogens
have restricted the productivity in the industry.

Profitability: The profitability of the industry has not been impressive.
The participants gave an average rating of 2.25 for profitability. Factors such as
price volatility, changes in the supply pattern, government regulations and cost of
pest management practices have lead to variability in and low levels of profits for
this industry.

The performance assessment of the Michigan vegetable industry has
revealed three moderate ratings and one low rating. The inability to provide
continuity in supply throughout the year has been identified as a limiting factor
for the industry. The industry operates in a highly competitive environment. They
need to address these issues at a broader industry level to increase their
competitiveness as compared to the other vegetable producing regions. Hence,
operational changes at the individual firm level alone are not likely to be enough.
Fundamental or long-term strategy changes at the industry level would be
required to achieve long-term growth.

4.2 SWOT ANALYSIS

In order to gain an overview of the strategic situation of the vegetable
industry in Michigan, a SWOT analysis of the industry is presented in this
section. SWOT analysis includes both the internal and external analysis of the
industry. See Exhibit 4.2 for a summary of all the individual SWOT elements

assessed.

33

Internal Analysis

The identification of the specific strengths and weaknesses of the
Michigan vegetable industry is included here.

Strengths

A wide variety of vegetables are grown in Michigan: Vegetables are
cultivated for flesh and processing markets. Cucumbers, tomatoes, asparagus,
celery and carrots are some of the leading crops that are cultivated in the state.
Buyers tend to prefer suppliers who can offer them a full line of products. The
ability to cultivate a full range of vegetables thus becomes an advantage for the
growers.

Pickle cucumber production: In 2000, Michigan was the top state in
pickle production (Michigan Department of Agriculture) and was also the leading
state in cucumber (processing) cultivation (29.4% of the total U.S production).
Numerous pickle-processing facilities are located within Michigan. The
production season for the pickling cucumbers is short and does not conflict with
the planting and harvest schedules of other crops, hence it allows for efficient use
of labor. This crop requires relatively lower inputs in terms of capital investment.
Varieties suitable for midwestem cultural conditions have also been developed.

Proximity to major markets: Michigan is generally within a two-day
drive of 60% of the U.S population. The Michigan producers are close to some
major metropolitan markets, e.g., Detroit, Chicago and the East coast, and they

also have a shipping cost advantage as compared to some other states.

34

Availability of natural resources: Michigan’s abundant land and water
resources enables the producers to have lower costs for some factors of
production as compared to their competitors in other states. For example,
irrigation water is difficult to obtain and is more expensive for producers in
California.

Weaknesses

Weather: The yearly fluctuations in the production of vegetable crops can
be attributed to the weather conditions. Michigan has a variable spring, with flost,
winds and heavy rains that makes it difficult for early season planting and
establishment of the vegetable crops.

Short marketing window: Due to the extreme climatic conditions
prevalent in the State, the producers have a short marketing window of a few
months only, hence they are unable to offer products throughout the year.

Late season: Michigan’s vegetable season is late hence more often it
becomes a disadvantage as the early producing areas remain in the market,
bringing prices down.

Pest problems: Phytopthora capsici could become the limiting factor in
pickle cucumber production in Michigan. This pathogen has infested a number of
soils. Processors have rejected whole loads of cucumbers flom the infested fields.
If adequate control measures are not taken, the well-established pickle cucumber
industry may soon be in trouble. Phytopthora could also pose a threat to squashes

and pumpkins in the future (Project GREEN, 2000).

35

Mindset of producers: Some of the Michigan producers are unwilling to
adapt to the new trends in the marketplace. For example, the Michigan carrot
producers have traditionally produced the large carrots (carrots packed in 3-pound
cello). Despite the growing preference for baby carrots, the Michigan flesh
market producers have been slow in making the transition. They continue to
produce large carrots and have contracts with processors.

Similarly, though consumers demand potatoes that are uniformly shaped
and packed in transparent covers, Michigan growers appear to be unwilling to
change their packaging to meet the changing consumer demand.Though the flesh
vegetable segment has been growing at a faster rate than processed vegetables, the
majority of Michigan producers have been reluctant in making the transformation.
EXTERNAL ANALYSIS

Identification of the opportunities and threats faced by the Michigan
vegetable industry in its competitive environment is considered next. Peterson’s
change force analysis and Porter’s competitive force analysis form the basis for
the external analysis of the industry.

Opportunities

Nutritional value of vegetables: There is a growing trend to eat healthier
and more nutritious food. Several federal initiatives including the U.S dietary
guidelines, the food guide pyramid, Healthy people 2002 and the National Cancer
Institute’s Five-day Program have stressed the nutritional importance of fluits and
vegetables (Rangarajan et al, 2002). Consumer’s increasing concern for calories,

saturated fat and cholesterol is reflected in the reduced consumption of red meats

36

and in the increased consumption of diets low in fat and high in fiber, such as,
fluits and vegetables. Increase in domestic produce consumption by 20% in the
past decade further confirms the growing importance of vegetables. (Epperson et
al, 1999)

Change in demographics: Consmner preferences change with a change
in demographics. The populations of Europe, Japan and the U.S are aging. It is
estimated that by 2030 more than 21% of the U.S population will be over 64 years
of age. The aging population tends to spend more on flesh produce due to the
health benefits associated with the products. Hence, we can expect an increase in
the demand for vegetables.

Growing preference for convenience: Consumers also tend to look for
convenience while selecting their fluits and vegetables. Precut, peeled and ready
for cooking products reduce the time needed to prepare a meal (Pollack, 2001).
Hence there has been an increase in the consumption of flesh out products, e.g.,
baby carrots and bagged salads.

Increase in demand for fresh produce globally: The demand for flesh
produce increases with increases in income. The per capita income has been
increasing globally and in the developing countries. Hence with globalization and
changes in lifestyle, the global demand for vegetables is likely to follow the trend
in the U.S. This offers an opportunity for the Michigan growers to supply
vegetables to countries abroad.

Growth in organic foods: Studies have revealed that 70 % of the U.S

consumers believe that organics are better for their health. Worldwide, the

37

markets for organic foods have been growing at an annual rate of 15-30% in
Europe, U.S and Japan (Lohr, 2001). Food scares related to diseases, pesticide
poisoning issues and concerns related to genetically engineered foods have
increased the demand for organic foods. This would be a future grth category
where tremendous opportunities lie.

Food labeling: This is an issue relevant to both the domestic and global
market. Labeling enables consumers to closely monitor their diets. It is expected
that in the future consumers will demand food labels that identify the country of
origin (Lohr, 2001). Use of coo-labeling is increasing in the developed countries.
This could be a future niche area for the vegetable industry.

Problems in the protein meat segment: There is a growing trend towards
vegetarianism due to the various problems in the protein meat segment, e.g.,
increases in the incidence of mad cow disease and foot-and-mouth disease. The
industry may take advantage of this issue by advertising and promoting the
nutritional benefits of vegetables.

Alliances: The increasing size and the decreasing number of customers-
retailers means that a larger size of suppliers is needed to balance the negotiating
power. In order to combat the buyer power, there is a trend towards
shipper/ grower consolidation in this industry. Consolidation enables the
shipper/ grower to offer continuous supply of vegetables throughout the year at
lower cost. The Michigan farmers should explore partnership/alliance

opportunities outside the state and globally.

38

Barriers to entry: Fresh cut products such as bagged salads require
substantial capital investment of plant and machinery. The processing facilities
are costly, as they contain different kinds of fixed assets with relatively limited
use other than processing salad ingredients, which leads to asset specificity. Asset
specificity and the high cost of these facilities leads to significant barriers to entry
in the flesh out vegetable segment. Michigan growers can take advantage of this
situation by extending flom mere flesh vegetable production to the production of
flesh out vegetables. This would enable the growers to differentiate their products
and increase their competitiveness.

Food safety issues: With growing consumer awareness for food safety,
programs such as HACCP (Hazard Analysis and Critical Control Point) are
becoming increasingly important in day-to—day operations. Producers are also
forced to adopt good agricultural practices and good management practices to
meet the varying private standards. By adopting these measures, producers will be
able to increase the competitiveness of their produce in the global market.

Access to markets: The easy access to a diverse market place (due to
geographic location) dramatically increases the opportunities for niche strategy
for the Michigan vegetable growers.

Positioning Michigan Asparagus: Traditionally the Michigan Asparagus
industry has relied on the processing market. In recent years, due to stiff foreign
competition, their market share has declined. Market research has revealed that
the per capita consumption of processed asparagus is bound to decline and the

consumption of flesh asparagus is expected to increase (Project Green, 2001).

39

Michigan asparagus, unlike asparagus flom other states, is hand-snapped above
the ground and this method results in a more tender and flavorful product, which
is perfect for salads, main dishes and appetizers. The Asparagus growers in
Michigan will have to position their asparagus to meet the growing demand in the
flesh market.

Shortage of skilled labor: The shortage of skilled labor in the restaurant
kitchen has been a major driving force for the increased demand of flesh cut
produce by the food service industry. This offers tremendous growth
opportunities for the flesh out vegetable segment.

Pesticide harmonization act: The NASDA (National Association of State
Department of Agriculture) has voted for renewed support for the Pesticide
harmonization act. This would eliminate current barriers that prevent U.S farmers,
dealers and distributors flom buying pesticides flom Canadian sources. Once this
becomes a law, producers would be able to save millions of dollars in production
costs.

Anti dumping: The U.S department of commerce has recently announced
margin percentages on Canadian greenhouse tomatoes imported into the U.S (The
Vegetable Growers news, 2002). This would in the future help the U.S
greenhouse tomato industry that was injured by the imports of greenhouse
tomatoes flom Canada, especially since these tomatoes were sold in the U.S
markets at less than fair value.

Technological advancements: With improvements in packaging, storage

and handling technologies, the demand for higher quality vegetables has

40

increased. Shippers who take advantage of these advancements are able to
maintain their competitive stance in the industry because they are able to meet
changing buyer demand more effectively.
Threats

Canadian counterparts: One of the major competitors for the Michigan
farmers are their Canadian counterparts. The growing, harvesting and marketing
of many of the vegetable crops in Michigan and Canada coincide. The imports
flom Canada tend to increase the price volatility in the markets leading to a
downward pressure on prices for Michigan vegetables.

Competition from California: The grower/shippers flom California raise
a wide variety of produce and are also involved in production and shipping
throughout the year. This enables them to maintain constant contact with their
customers. The inability to offer year round produce makes it difficult for the
Michigan producers to compete with the grower/shippers flom California.

Global competition: Trade liberalization and regional trade agreements
(such as, NAFTA in North America, MERCOSUR in Latin America, and the
European Union) have expanded market access enabling retailers to procure
produce flom suppliers worldwide. This has increased the competition for
producers in Michigan and the U.S.

Exchange rate affecting exports: Since the U.S dollar is stronger than
most of the currencies in the world, the Michigan producers face stiff competition

in the global markets.

41

Cannibalism of products: The increase in demand for bagged salads has
decreased the demand for tomatoes, as tomatoes are not a part of the salads.
Similarly with the increased popularity of the whole peeled baby carrots flom
California, the Michigan cello carrots sales are likely to be hit hard.

Industry rivalry: The price competition for non-value added commodity
products is high in this industry. The shippers undercut their prices in order to
gain preferential access to suppliers. This increases the rivalry and decreases the
profitability within the industry.

Chemical regulations: Changes in the government regulations are
threatening the availability of certain pesticides. Because vegetable crops require
high levels of pesticide use, these regulations can adversely impact the industry.

Labor regulations: The vegetable industry is heavily dependent on labor.
Changes in government regulations that increase the cost of labor and the shortage
of labor can have a negative impact on the industry.

Retailer consolidation: As retailers consolidate their bargaining power
increases. They tend to prefer suppliers who can offer them a full line of products
in larger quantities and with consistent quality throughout the year. Retailers also
prefer suppliers who can pack their products with private labels on them and who
also are willing to adapt to the changing trends.

Food safety issues: The various incidences of large-scale food
contamination have increased the liability for the producers. The industry has to

take extreme precautions and maintain a high level of food safety standards

42

because any negative public image due to food contamination can adversely
impact the industry.
Summary of SWOT Analysis

The intention of the SWOT analysis is to examine the industry both
internally and externally. The results of the SWOT analysis for the Michigan
vegetable industry are not very encouraging. The Michigan producers have some
inherent strengths - abundant natural resources, diversity of raw products and the
proximity to major markets. Nevertheless the impacts of weather and the short
marketing season more often become serious weaknesses for the producers. The
changing consumer demand pattern, growth in niche segments and the
improvements in technology are in favor of the industry. However, the Michigan
vegetable industry faces significant competitive threats flom the increasing
bargaining power of their buyers (retailers due to consolidation) and intense
industry rivalry. The changing regulations and global supply competition also
pose severe threats to the industry.
4.3 Strategic issue synthesis

The strategic issue synthesis is built on the analysis presented in the
previous sections. The core competencies, the competitive advantages, the need
for change, and the critical strategic issues are presented.
4.3.] Core Competencies and Competitive advantage

A core competency is an area where the industry does extremely well as
compared to its competitors. Further, a competency that is inimitable and that

gives competitive benefit to the industry is a competitive advantage. SWOT

43

analysis helps in identifying the core competency and competitive advantage of
an industry. 3

From the analysis it is evident that the vegetable industry is in the maturity
stage of the market life cycle and the environment in which the industry operates
is highly competitive. For long-term survival in a highly competitive
environment, the industry requires a truly sustainable competitive advantage.
Apart flom California, Michigan is the only other state in the U.S that has the
diversity of raw products. Since the buyers prefer suppliers who offer a broad line
of products, the ability to cultivate a wide variety of vegetables is the only true

core competency and competitive advantage of the industry.

 

 

4.3.2 The Change grid
Opportunities
Turnaround A
Offense
MI vegetable
Industry
Weaknesses 4 F Strengths
Defense Diversification
Threats

The Michigan Industry’s position in the left upper quadrant of the change
grid clearly reflects the magnitudes of its weaknesses as well as the opportunities

it faces. It is clear that the industry is constrained by its weak internal resources.

Although the opportunities identified in the SWOT analysis seem to be quite
general, their number is significantly large to suggest apotential to overcome the
threats, which are more specific. In order to turnaround the industry, a
repositioning strategy needs to be adopted that would enable the industry to
prevail over their current weaknesses and favorably exploit their opportunities.
4.3.3 CRITICAL STRATEGIC ISSUES

The goal of a strategic analysis is to examine an industry and identify the
strategic issues it faces. Through the analysis, the following critical strategic
issues have been identified for the industry.
1. How will the industry overcome the inability to offer a continuous supply
of vegetables throughout the year?
The producers are unable to offer continuity in supply throughout the year due to
the extreme climatic conditions prevalent in the state. This inability becomes a
serious disadvantage for the Michigan producers since they lose preferential
access to markets and also retailers. This was also identified as a limiting factor
during the performance assessment of the industry. This issue has to be addressed
in order to improve the customer satisfaction and increase the competitiveness of
the industry.
2. How will the industry differentiate itself in order to create and maintain
customer satisfaction and competitive advantage?
Increase in global trade has expanded market access. Consequently, the supply
competition for commodity vegetables has also intensified. In addition,

consumers are giving more importance to value added characteristics while

45

making their purchasing decisions. In response to these two trends, it becomes
imperative that the industry offer differentiated products by adding value through
quality or extra features. This will enable the industry to position itself against
competition and also increase customer satisfaction. Therefore, this issue becomes
critical and has to be addressed.
3. How will the industry face the increasing regulatory pressures?
Vegetable crops require high levels of chemicals, moreover the industry is also
labor intensive. With the increasing concern on environment and food safety, the
government regulations have become more stringent, threatening the availability
of pesticides important for the industry. Thus the increase in regulatory pressures
in the form of chemical and labor regulations increases the. cost to the industry
and adversely affects overall profitability. The performance appraisal revealed
that the low level of profitability for the industry is a major concern. This clearly
indicates that regulatory pressure is a critical strategic issue that has to be
addressed with broader industry level changes.
4.4 Chapter summary

An assessment of the industry’s performance has revealed moderate levels
of customer satisfaction, competitiveness and productivity and a low level of
profitability. This clearly suggests the need for strategic analysis in the industry.
The SWOT analysis shows that the industry is constrained by weak internal
resources. The analysis of the industry’s external environment shows more
general opportunities than specific threats. The industry’s position on the change

grid thus indicates the need for a turnaround-oriented strategy for the future.

46

Through the strategic analysis, the inability to offer continuity in supply
throughout the year, the need for differentiation, and the increasing pressure flom
regulations have been identified as the critical issues for the industry. In order to
ensure a successful future, these issues have to be addressed by any strategy

adopted by the industry.

47

Exhibit 4.1: Performance Assessment of the Michigan vegetable Industry

Participants of the Scenario analysis workshop were divided into six groups and were
asked to assess the performance of the Michigan vegetable industry. They rated the
industry on a scale of 1 (low performance) to 5 (high performance).Their ratings were as

 

 

 

 

 

 

follows:
Group] Group Group Group Group Group Average
2 3 4 5 6
Customer F-2 F- 3.5- F—3 4 3 F-3 3.4
satisfaction P-4 P- 3.5+ P-5
Competitiveness F-2+ F-4 3.3
P- 2+ 3 F4 4 4 P-2
Productivity F- 2+ F-5 3.6
P- 2- 4 4 4 4 P-3
Profitability F- 1+ F-3 2.25
P- 1+ 2 3 2 2 P-4

 

 

 

 

 

 

 

 

F- Fresh vegetables

P- Processed vegetables

48

 

Exhibit 4.2: SWOT analysis of the Michigan vegetable Industry

 

 

 

 

 

STRENGTHS WEAKNESSES

Wide variety of vegetables Weather

Pickle cucumber production Short marketing window
Proximity to major markets Late season

Availability of natural resources Pestjroblems

 

Mindset of producers

 

 

 

 

OPPORTUNITIES THREATS
Nutritional value of vegetables Canadian counterparts
Change in demographics Competition flom California

 

Growing preference for convenience

Global cometition

 

Increase in demand for fleshproduce globally

Exchange rate affecting exports

 

 

 

 

 

Growth in organic foods Cannibalism of products

Food labeling Industry rivalry high for commodities
Problems in the protein meat segment Chemical regulations

Alliances Labor regulations

High Barriers to entry for flesh cut products Retailer consolidation

 

Food safety issues

Food safety issues

 

Access to markets

 

Positioning the Michigan Asparagus

 

Shortage of skilled labor in restaurants

 

Pesticide harmonization act

 

Anti dumping

 

 

Technological advancements

 

 

49

 

CHAPTER 5

Industry Scenarios and Competitive Strategy under Uncertainty

The purpose of this chapter is to understand the ways and means by which
the Michigan vegetable industry can effectively manage uncertainty in the future.
The information for this chapter is heavily drawn flom the scenario analysis
workshop titled “Managing Uncertainty”. The participants in this workshop listed
the uncertainties, envisioned the possible paths for these uncertain forces and also
built the future scenarios (Refer to section 1.2 for details). Views of the
participants and the analysis of the author are presented in this chapter. The key
uncertainties are described in the first section. In the second section the possible
alternative future scenarios are presented. The third section includes possible
strategies for dealing with uncertainty.
5.1 Fundamental Uncertainties for the Michigan vegetable industry

The future of the Michigan vegetable industry is driven by a number of
forces that will have relatively certain and relatively uncertain impacts in the
industry’s future. In order to have a better perspective of the future of the
industry, it becomes imperative most especially to understand these uncertainties.
In this section, seven uncertainties likely to impact the industry are briefly
described. The first six of these were fully discussed in the scenario analysis
workshop, while the seventh, technology, was added here to complete the
analysis.

The first industry-identified uncertainty was the nature of increasing

regulatory pressure. The pressure includes chemical, labor and transportation

50

regulations. It remains certain that regulatory pressures are bound to change in the
future, however the extent and the kinds of regulatory pressure and their rate of
implementation remain uncertain. The regulations may come into effect fast and
they may be tough. Nonetheless, there is also a possibility that the regulations
may be implemented more slowly and they may be relatively easier on the
industry.

Chemical regulations are related to environment and food safety concerns.
Increasing pressures at the public level have reduced the government set
tolerances for certain pesticides and have also resulted in the ban of certain others.
Labor regulations have also become stringent in the recent years. It becomes
difficult for the industry to meet customer quality requirements due to these
increasing regulations. Thus due to the uncertainty in the nature of regulatory
pressure the returns to the industry also remain uncertain.

The second industry-identified uncertainty was global supply and sourcing
activities. It is certain that the changing domestic and trade policy variables
influences global sourcing activities, which successively affects the supply
competition in the local industry. However, the openness of trade and the
willingness of buyers to buy global products remain indeterminate leading to
uncertainty in the global sourcing activities.

In the future, the trade policies may be more open due to the increasing
multilateral and regional trade agreements, and buyers’ willingness to source
globally may increase due to the easy availability of good supply at low prices.

Conversely, the changing trade policies could decrease the openness of trade. In

51

addition, the buyers may become reluctant to source globally due to factors such
as stringent food safety measures. Hence the competitiveness of Michigan
vegetable industry relative to the global industry remains rather uncertain.

Industry had identified the third uncertainty as urban sprawl. It is certain
that Michigan is losing a significant amount of its distinctive green space to
development. Tracts of farmland are being swallowed up, plowed under, and
paved over for sprawling residential subdivisions. This clearly indicates that
urban sprawl is bound to continue in the future. However, there are uncertainties
regarding the pace and extent of urban sprawl. The sprawl can be widespread and
fast due to less governmental intervention or the pace can be slow and the scope
limited.

Urban sprawl increases the land prices, and farmers find it profitable to
sell parts of their land for development rather than keep it in farming. Large
farming operations may cease to exist in this situation, ultimately decreasing
agricultural output. The impact of this sprawl on the Michigan vegetable industry
nonetheless remains uncertain due to uncertainties regarding the pace and extent
of urban sprawl.

The fourth uncertainty identified by the industry was changing consumer
trends. It is definite that the population is aging globally and the demand for
convenience foods are increasing. This indicates that the demand for flesh
vegetables and flesh cut vegetables are bound to increase in the future. However

there are uncertainties regarding the food safety issues and demand for organics.

52

The competitiveness of meat and other substitutes with vegetables are also
indeterminate.

In the future, it is possible that the problems in the protein meat segment
will decrease the competitiveness of meat thereby increasing the effective demand
for vegetables. Further, the industry could also respond favorably to the food
safety issues and the increasing demand for organics.

On the other hand, it is likely that with the increase in the competitiveness
of meat and other substitutes, the effective demand for vegetables will decrease
and the negative public reaction due to food contamination in Michigan
vegetables could adversely impact the industry. Thus the uncertainty in the
changing consumer trends leads to uncertainty in the future of the Michigan
vegetable industry.

The industry-identified fifth uncertainty was the changes in the world
economy. Strength of the dollar and the effective demand for the industry
products remain uncertain due to the uncertainty in the world economy. A strong
dollar coupled with global recession leads to a decrease in the U.S vegetable
exports and adversely affects the industry, whereas a weak dollar along with an
increase in the global income levels increases the exports and has a positive
impact on the industry.

Thus it is certain that macroeconomic shocks such as currency exchange
rates and changes in the interest rates affect agricultural prices, production,

consumption and trade. However, the benefits and costs to the Michigan

53

vegetable industry due to the changes in the global economy in the future remain
uncertain. .

The sixth industry-identified uncertainty was the rate and intensity of
retailer consolidation. It is certain that with increasing globalization, consolidation
among retailers is inevitable. Consolidation increases the market power of
retailers. They demand high quality products at lower prices. In addition, they
tend to exert pressure on their suppliers.

However, it remains unclear whether this consolidation would lead to a
few big retailers with global control or if the pace of consolidation would
decrease resulting in big and small retailers existing together. Thus the changing
relationships between the suppliers and retailers and their influence on the
Michigan vegetable industry continue to remain uncertain.

The seventh uncertainty that is likely to impact the industry is
technological change. It is certain that advancements in technology will continue
to influence the production, marketing and distribution of the products in the
industry. However, there are uncertainties regarding the rate at which these
technological changes are occurring, level of adoption by the industry, and the
cost of technology. It is possible that these changes may happen fast, and the level
of adoption may be high, hence the industry will incur higher costs to remain
competitive. Conversely these changes may happen slowly and their rate of
adoption may be slow. The industry will thus have time to adapt to the changes.

Suppliers are able to meet the changing demands of the retailers due to the

advancements in storage, post harvest and transportation technology. The

54

improvements in technology may allow the industry to reduce costs in the future.
It is certain that to increase their competitiveness the industry will have to use
technology as efficiently as possible. However it is not certain if they are well
equipped to do so.

5.2 Possible scenarios under uncertainty

Three possible future scenarios were developed by the participants of the
scenario analysis workshop based on the combinations of the outcomes of the
uncertain forces. These scenarios are presented in this section.

Scenario 1: Survival of the few

The “survival of the few” scenario for the Michigan vegetable industry
arises due to a number of reasons. The vegetable industry suffers flom the loss of
effective pesticides due to stiffened chemical regulations leading to unacceptable
crop volumes. The use of [PM techniques to combat regulations and rigid labor
policies increases the costs to the growers. Enforcement of stiff transportation
regulations regionalizes the industry. Increased regulatory pressure flom the
government adversely affects both the producers and the processors. However, a
few producers focusing on niches such as organic vegetables benefit flom the
same.

Changes in the trade policy variables and regional trade agreements
increase market access. Instead of living on processed vegetables in winter,
consumers purchase flesh produce procured globally flom the neighborhood retail
stores. The influx of global supply flom retailers sourcing abroad increases the

supply competition and leads to a loss of most of the Michigan vegetable industry.

55

Michigan producers are unable to meet the private standards of global retailers
due to their lack of interest in adopting good agricultural and good management
practices. Production and processing operations of the Michigan farmers are
hence limited for local consumption and sale only. Marketers who integrate
vegetable and non-vegetable crops manage to survive.

Dramatic increase in urban sprawl takes some of the best land out of
production at a prodigious rate. Producers find it profitable to sell parts of their
land for development rather than farm. Hence large farming operations cease to
exist and cultivation is limited to flagrnented tracts. This decreases the land
available for rotation. Sprawl results in increased taxes decreasing the profits for
the remaining few producers.

Food borne illnesses and deaths of consumers are traced back to poor
agricultural practices and improper handling of flesh produce by the Michigan
industry. Financial losses resulting flom this food borne attack devastates the
vegetable industry. Consumers prefer only flesh vegetables resulting in dramatic
loss for processors in the state. In addition, the industry is unable to meet the
growing demand for flesh out vegetables as the demand for convenience products
increases. The changing consumer trends adversely impacts the industry.

Recession in the world economy continues to appreciate the value of the
U.S dollar. The strong dollar reduces exports and increases imports. Decline in
demand for U.S vegetables makes it uneconomical for the producers to remain in

the business.

56

Consolidation results in a handful of big retailers who procure flom big
suppliers only. Local retailers go out of business. Big retailers impose stringent
private standards to emphasize food safety/quality. Small farmers find it
extremely difficult to meet the demanding private standards. The few big
suppliers who remain are vertically integrated with the retailers.

It also becomes mandatory for shippers to invest in improved
technologically advanced storage facilities. In order to gain preferential access to
retailers, shippers are forced to adopt vertically integrated network systems.
Competition increases as producers flom other regions such as Florida, adopt
bioengineering techniques to prolong the life of flesh produce. Technologically
advanced shippers survive in the state, while others find it increasingly difficult to
continue.

Synopsis: The industry reduces to a few firms only. The bigger ones are
vertically integrated with the retailers, and the small ones concentrate on
“extreme” niches. These firms limit their operations within the state. The firms
who remain are the ones that adopt good agricultural and good management
practices. Consolidated retailers exert severe pressure on the suppliers. Vegetables
sourced globally are available in plenty whereas it becomes difficult to find
vegetables cultivated within Michigan. The Michigan producers are unable to
meet the growing demands of the retailers. Both producers and processors alike

find it uneconomical to continue in this industry.

57

Scenario 2: No Surprises

The “no surprises” scenario for the industry can be attributed to numerous
causes. Regulatory pressures continue to increase in different forms: There is a
slow but steady loss of labor-intensive crops due to increases in labor regulations
and chemical regulations have a declining effect on the crop volumes. Increase in
transportation regulations makes it difficult to compete beyond the regional
boundaries. Researchers develop more environmentally fliendly disease and pest
control strategies to improve product quality while simultaneously reducing the
amount of chemicals used. Producers adopt IPM techniques along with chemical
control measures.

As global sourcing slowly expands, only good growers survive and they
heavily rely on government intervention, corporate farming and forced
cooperation with other supply chain participants. Producers both in Michigan and
globally are forced to adopt good phytosanitary measures to meet the varying
private standards.

With increasing urban sprawl, and a steady increase in land prices, the
agricultural land in Michigan gets converted for non-agricultural uses. There is a
slow death to production and processing as sprawl slowly expands.

Emphasis on healthy foods and year-round supply continues the attrition
of producers, processors and packers. There is increasing concern among
consumers for food safety issues. The increase in demand for convenience

products increases the demand for flesh cut vegetables and bagged salads.

58

The changes in the world economy have varying consequences on
Michigan. While the strong U.S dollar decreases the agricultural exports, the
demand for U.S produced vegetables increases due to the emerging middleclass
worldwide.

A few big retailers and some small niche retailers continue to coexist.
Shippers and producers strive to have one big retailer and several small retailers
in their business mix. Convenience stores become an important new channel.
Some big growers and retailers are linked through advanced computer systems,
while some are not.

Technological advancements in storage, post harvest and transportation
technology increases the demand for flesh produce throughout the year. Growers
using advanced technology manage to have a competitive edge over the others.

Synopsis: The industry is comprised of big, medium and small players.
The production systems in Michigan include both conventional and organic
farms. The industry is highly competitive with increasing pressures flom global
supply. A wide variety of vegetables are available for the consumers due to the
increase in global trade. Fresh vegetable consumption increases. Specialty
vegetable producers continue to serve niche markets. In order to meet the growing
demands of the consolidated retailers, shippers too move towards consolidation.
Scenario 3: Renewal and Growth

The renewal and growth scenario can be attributed to many causes. An
open labor border with Mexico, realistic enforcement of the Food Quality

Protection Act, and decreased chemical registration costs for minor uses results in

59

a dramatic reduction in the impact of regulations. Research also aids in the
development of IPM measures, which decreases the costs of regulations to the
industry. The improvements in labor, chemical and transportation conditions fuels
revitalization of the industry.

U.S tariff barriers and favorable taxes in the U.S drastically
reduces the global sourcing by the retailers. The global suppliers are unable to
meet the standards imposed by the U.S retailers. Label of origin regulation
promotes sales of U.S produced products globally. Producers in the state adopt
HACCP and other phytosanitary measures, which increase the demand for i‘.
Michigan products. New processors enter the industry and the existing ones
expand their production. The Michigan industry benefits flom this situation.

Driven by legislation and sales of development rights, farmland
preservation provides safe haven flom sprawl. Land is subjected to differential tax
depending on its use. Land use regulation that concentrates population reduces
sprawl and increases the farm-direct products.

Michigan producers gain leadership in Integrated Pest Management and
food safety, which results in dramatic increase in consumer acceptance. As the I
population ages, the consumption of vegetables increases and Michigan rides the
change. Michigan producers take advantage of the growing importance given to
convenience by producing more flesh out products.

Strong world economy leads to a tremendous increase in the income levels
in the developing world. With high-income levels consumers demand more flesh

and processed vegetables flom Michigan. Processing stabilizes in the state.

60

Consumers reject big stores due to their lack of convenience and
responsiveness. There is increasing preference for local products flom local
producers, processors and retailers. Giant retailers discover that they cannot
effectively manage size. Due to the decrease in giant retailers even small farmers
who are not vertically linked with retailers manage to survive. Gourmet perishable
stores emerge as a major new channel.

Michigan shippers use vegetable coatings and bioengineering techniques
to provide continuity in supply throughout the year by extending the shelf life of
seasonal perishable products.

Synopsis: The Michigan industry is highly profitable. The growers and
processors expand their production capabilities. Vegetables produced in Michigan
are available in plenty. Due to the perceived high quality standards, the worldwide
demand for the Michigan vegetables increases.

5.3 Competitive strategies under uncertainty

In order to help the industry effectively manage the identified
uncertainties, this section presents competitive strategies implementable under
each of the three scenarios.

5.3.1 Strategy for Scenario 1

Strategic alliances for production and marketing, employing compliance
specialists for managing regulations, use of IPM techniques to overcome chemical
regulations and having a long-range plan were the broad strategies suggested by

the industry for overcoming uncertainties in “survival of the few” scenario.

61

Strategies further elaborated by the author are presented herewith. In this
scenario only big firms or specialty crop producers survive. In order to have a
competitive advantage and earn above average returns, the big firms should
pursue cost leadership strategies (best price and low cost provider), while the
specialty firms need to pursue niche strategies (best value for a limited market,
most focused provider).

It becomes mandatory for firms to adopt HACCP, good agricultural
practices and good management practices in their day-to-day operations in order
to prevent food borne illnesses and maintain high quality food safety and
phytosanitary standards. Use of intense IPM programs or organic farming helps
firms to overcome stringent chemical regulations. By employing government
compliance specialists, the firms are able to effectively manage regulations.

Growers in Michigan should concentrate more on the flesh vegetable
category and pursue diversification into the production of flesh cut vegetables and
bagged salads. This would enable the firms to meet the growing demand for
convenience products.

Vertical integration with retailers by big firms, and adoption of
specification contracts by specialty firms allows the firms to meet the growing
demands of the giant retailers. Alliances with non-competing regions and also
partnerships with other growers, agencies and organizations helps them in

lobbying and promoting Michigan products.

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5.3.2 Strategy for Scenario 2
Formation of alliances, managing regulations, adoption of technology,
educating the public on the ill effects of sprawl and use of IPM techniques were
the broad strategies called for by the industry.

Further analysis by the author has revealed the following strategies. In this
scenario big, medium and small firms coexist. For a competitive advantage and to
effectively deal with the intense price competition firms will need to either
differentiate (best customer benefits flom quality/ features) or have a niche
strategy (best value for a limited market, most focused provider).

Marketing strategy would include market expansion and product
modification. Strategic alliances and joint ventures will enable the medium and
small vegetable firms to go global and enter international trade thereby expanding
their market access. Firms can modify their products by adding value through
increased quality or new features. Producers/processors adopting Eco labels,
organic labels or [PM labels may be able to charge a price premium. Firms in
Michigan will also need to aggressively promote their products to retain their
market share.

To meet the private standards and increase the competitiveness of their
produce in the global market, it will be essential for producers to adopt good
agricultural and management practices.

5.3.3 Strategy for Scenario 3
Managing regulations, formation of alliances and focus on marketing were

the broad strategies suggested by the industry for managing the third scenario.

63

Expansion of the strategies by the author is as follows. Firms of different
sizes exist in this scenario. For competitive advantage firms may adopt cost
leadership strategy, differentiation strategy or niche strategy. Strategic alliances
with shippers/ growers in different parts of the country/ globe help in expanding
their market access. They are able to cater to niches by adopting organic or IPM
labels.

Regulations continue to exist; hence, firms will need to adopt strategies to
effectively manage regulations. Integrating IPM along with chemical control
measures will give them an added advantage. Setting high quality food safety
standards will help increase the consumer perception of quality.

Educating the public on ill effects of urban sprawl with the aid of the
Michigan Department of Agriculture and MSU Extension would be necessary to
prevent further sprawl.

5.3.4 Strategy under uncertainty

The analyses in the preceding sections have revealed that the future of the
Michigan vegetable industry remains uncertain. It is clear that if given a choice,
the industry would prefer the third scenario to the first and the second. Hence, in
order to effectively manage uncertainty in the firture, proactive strategies that
would promote the evolution of the third scenario over the first and second are
essential. These strategies are now presented.

1. The vegetable industry operates in a highly competitive environment. In
order to satisfy their customers and simultaneously beat competition, firms have

two main options, either adopt a differentiation strategy or adopt a niche strategy.

Differentiation strategy: Differentiation is a strategy of offering a
product that is perceived as being unique. The firms can differentiate their
products by adding value through increased quality or new features. Producers
can enhance the value of their raw products by offering specific varieties, high
quality supplies or features such as environmental certification.

Consumers place emphasis on added value and quality characteristics
while making their produce purchase decisions. There has also been an increased
interest in features such as nutrition content, brand label, genetic composition and
pesticide residues. Differentiation strategy will allow the firms to increase their
competitiveness and also improve customer satisfaction. In addition, the barriers
to entry increase in the industry when firms offer differentiated products.

Niche strategy: Firms that aim to serve a particular target segment can
use this strategy. With global consumer interests in health and environmental
concerns, niches such as organics and eco labeled products are the expected future
growth categories. Eco labeled products also include IPM (Integrated pest
management) labels. Firms can concentrate on these niches in order to obtain a
premium.

2. Increasing regulation was identified as an uncertainty that was likely to
impact the industry in the future. In addition, it was identified as a critical
strategic issue for the industry. Hence strategies for managing regulations are
essential for effectively managing the firture. Use of [PM techniques and

formation of producer groups will enable the industry to deal with this issue.

65

Use of IPM techniques: Integrated pest management methods seek to
minimize the level of pesticide applications. Hence adoption of IPM techniques
will enable the industry to quickly respond to the changing government
regulations so that they can continue to produce quality products in a cost-
effective manner.

Performance assessment had revealed a moderate level of productivity for
the industry, which was attributed to the disease/pest problems. Some of these
pests/diseases have developed resistance to chemicals that were meant to control
them. Integration of IPM techniques along with chemical control measures will
thus enable the industry to control pests/diseases in turn addressing the issue of
low productivity.

Formation of producer groups: Organized producer commodity groups
are most successful in influencing the government officials to defend their
interests. The industry will be able to efficiently address the issue of increasing
regulations by organizing themselves.

3. The inability to provide continuity in supply throughout the year was
identified as a limiting factor during the performance assessment of the industry
and as a critical strategic issue as a result of the strategic analysis. This inability
decreases the competitiveness of the Michigan vegetable industry relative to the
other vegetable producing regions.

Formation of strategic alliances: The alliances/joint ventures with

suppliers in different parts of the country/ globe will enable the industry to provide

66

continuity in supply year round. This will also ssist the small and medium size
firms to enter the global trade and gain preferential access to buyers.

The capacity to provide an array of produce and maintain steady supply will
increase the competitiveness of the industry.

Green house production: Addition of green house production will allow
producers to stretch their season thus overcoming the inability to provide produce
throughout the year.

4. Consolidation has increased the market power of retailers. They demand
consistent quality, good produce throughout the year and also negotiate lower
prices. Large retailers impose severe private standards on the industry. Strategic
alliances, adoption of Phytosanitary standards and use of advanced technology
will allow the industry to overcome the threat of retailer consolidation.

Strategic alliances: The pressures of supply chain management have also
reached the producer/shipper level. There is an increasing need to form marketing
and distribution alliances among the grower/shipper firms to cut costs and
improve their efficiencies. Alliances with retailers will enable the
producers/shippers to gain preferential status and also expand market access.

Phytosanitary measures: Implementation of HACCP and other
phytosanitary measures such as good management practices and good agricultural
practices will facilitate the industry’s ability to meet the demanding food safety
/quality standards. This will also help prevent the industry flom any negative

public image due to food contamination that can have an adverse impact.

67

Technology: The adoption of advanced storage and post harvest
technology will allow producers/shippers to increase their competitiveness. By
being vertically linked through advanced network systems in the supply chain,
producers/shippers are also able to meet the growing demands of the consolidated
retailers.

5. Globalization has increased the supply competition. Hence it becomes
essential for firms in Michigan to aggressively promote their products to retain
market share.

Marketing: The industry consists of a number of small and medium sized
firms; hence, coordinated efforts to promote industry products and expand

markets will be essential. Industry coordinated marketing strategy such as
advertising and promotion will enable the industry to communicate the desirable
attributes of their products. In order to maintain a competitive edge in the global
market it becomes necessary for the industry to adopt these changes.
5.4 Chapter Summary

Increasing regulatory pressure, global sourcing and supply activities,
urban sprawl, changing consumer trends, changes in the world economy, retailer
consolidation, and technological changes were identified as the seven
fundamental uncertainties likely to impact the industry. Based on combinations of
possible outcomes for the uncertainties, three possible future scenarios--survival
of the few, no surprises, and renewal and growth--were developed. Competitive

strategies for dealing with uncertainty under each scenario were also presented.

68

In order to manage uncertainty in the future, proactive strategies will need
to be adopted by the industry. Formation of strategic alliances with
domestic/ global suppliers flom other vegetable producing regions will enable the
industry to provide a wide range of products throughout the year to their
customers. Use of integrated pest management techniques will allow the industry
to manage regulations better. Adoption of HACCP and phytosanitary measures in
their daily operations will facilitate the industry’s ability to meet the increasing
demand for food safety standards. Industry coordinated efforts would also be
required for promoting their products. These strategies will also address the

critical strategic issues identified as a result of the strategic analysis.

69

CHAPTER 6
Conclusions

The purpose of this chapter is to highlight the key findings of the study
and suggest strategic alternatives. The first section includes a review of the
methodological approach. The key findings of the study are briefly described in
the second section. The strategies to face an uncertain firture are presented in the
third section.

6.1 Framework revisited

Review of relevant literature helped identify the analytical flamework for
the strategic positioning study of the Michigan vegetable industry. Strategic
Analysis and Scenario Analysis are the two techniques that have been used in this
study. Strategic Analysis, which included both the situation analysis and strategic
issue synthesis, has facilitated understanding of the critical strategic issues faced
by the industry. The use of Scenario Analysis enabled identification of ways and
means for successfully managing uncertainty in the future.

Identifying the critical strategic issues faced by the industry was the first
objective of this study. This study was based on information collected through
secondary sources, and it was highly qualitative and did not rely on quantitative
data or analysis. In addition, the study was made on an aggregate basis for the
whole Michigan vegetable industry and was not specific to any crop. Given these
characteristics of the study, the methods adopted to achieve the first objective
proved to be strongly acceptable for the task. In particular, situation analysis is a

technique widely used by different industries and firms. In this study on the

70

Michigan vegetable industry, this accepted body of analysis was extended to
include strategicissue synthesis. The combination allowed for insightful analysis
of the Industry’s situation and a clear articulation of critical strategic issues.

The second objective of this study was to analyze and develop strategies
for facing uncertainty in the future. The uncertainties of the future events that are
likely to affect the Michigan vegetable industry cannot be estimated using a
probability distribution; neither can these uncertainties be easily modeled. This
study drew upon industry expertise and subjective interpretations of ferces
changing the industry and thus influencing the future. In this case, scenario
analysis proved to be a highly effective technique for gathering information from
industry participants and then allowing them to formulate strategy
recommendations relevant to the futures envisioned.

This study would thus suggest that both Strategic Analysis and Scenario
Analysis are highly relevant to such industry studies and should be used by other

academic and management personnel interested in such studies.

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6.2 Key findings
6.2.1 Strategic analysis of the industry

The first step in the strategic analysis process was the performance
assessment. The assessment revealed moderate levels of customer satisfaction,
competitiveness and productivity, and a low level of profitability. The inability to
provide continuity in supply was identified as a limiting factor for the industry.
The performance assessment justified the need for broader strategic changes at the
industry level in order to improve competitiveness and achieve long-term growth.

Subsequently, the SWOT analysis of the industry was conducted. The
results of this analysis are not very encouraging. The industry has some inherent
strengths, e.g., abundant natural resources, diversity of raw products and
proximity to major markets, however the short marketing window and the
influence of weather are limitations that impede their performance. Changes in
consumer demand patterns, grth in niche segments and improvements in
technology are in favor of the industry. Nevertheless, changing government
regulations, global supply competition, intense industry rivalry and consolidation
of the buyers are severe threats to the industry.

Drawing on the prior analysis and putting the overall industry situation in
perspective, the ability to offer a diverse array of raw products was identified as
the core competency and competitive advantage of the industry. The Michigan
vegetable industry’s position in which weaknesses tend to dominate strengths and
opportunities slightly outweigh threats clearly calls for a repositioning strategy in

order to turnaround the industry.

72

Through Strategic Analysis, the inability to offer year round supply, the
need for differentiation and increasing regulations wree identified as the critical
strategic issues that need to be addressed to ensure a successful future for the
Michigan vegetable industry.

6.2.2 Scenario analysis

The nature of increasing regulatory pressure, global sourcing and supply
activities, urban sprawl, changing consumer trends, changes in the world
economy, retailer consolidation and technological changes were identified as the
seven fundamental uncertainties likely to impact the Michigan vegetable industry.

Three possible future scenarios--survival of the few, no surprises, and
renewal and growth--were developed, based on the plausible combinations of
these uncertain forces. In the first scenario, “survival of the few”, the industry
reduces to a few firms only and they limit their operations within the state.
Retailers consolidate and exert severe pressure on the existing firms. It becomes
impossible for the firms to survive without forming alliances with the retailers.
Due to the increase in global sourcing activities, vegetables cultivated abroad are
available in plenty. In this scenario both the producers and processors alike find it
difficult to survive on their own.

In the “no surprises” scenario, the industry is comprised of small, medium
and big players. The Michigan vegetable industry is highly competitive.
Increasing labor and chemical regulations has a declining effect on the crop
volumes. Retailer consolidation leads to increasing private standards in the

industry, which forces producers to adopt good phytosanitary measures.

73

The “renewal and growth” scenario is the one that would be most favored
by the industry. Open-border labor policies with Mexico, realistic enforcement of
the Food Quality Protection Act, and decreased chemical registration costs for
minor uses dramatically decreases the impact of regulations on the industry. The
global suppliers are unable to meet the standards imposed by the U.S retailers.
There is an increased demand for Michigan products due to perceived high quality
standards and the industry benefits flom this situation. The growers and
processors in Michigan expand their production capabilities and the industry
becomes highly profitable.

6.3 Recommended strategies for the future

Proactive strategies are recommended to address the critical strategic
issues and to manage uncertainty in the future.

Strategic alliances with domestic/ global suppliers flom other vegetable
producing regions will enable the industry to provide an array of products
throughout the year to their customers. Alliances with retailers will help the
producers/shippers to gain preferential status and also expand market access.

Effective farm strategies, such as, adoption of HACCP in day-to—day
operations, will facilitate the industry’s ability to meet varying private standards.
Industry coordinated marketing efforts, such as, advertising and merchandising,
are required to enable the industry to promote their products. The Michigan
producers will also need to use supply and marketing information as well as
technology as efficiently as possible to meet the changing demands of the supply

chain.

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6.4 Next Steps

The Michigan vegetable industry will have to form a Michigan vegetable
industry strategic group comprising of growers, processors, shippers, packers,
members of Michigan state university extension team, faculty and other university
officials who work on matters related to this industry.

The primary focus of this group should be to adopt a repositioning strategy
in order to turnaround the industry. This would enable the industry to prevail over
their current weaknesses and favorably exploit their opportunities. The industry
strategic group will then need to adopt strategies to address the critical strategic
issues identified in this study.

In this study uncertainties likely to impact the industry in future have been
identified and strategies have also been recommended to face these uncertainties.
The industry strategic group will need to help implement the strategies based on
their setting of priorities and their working'with individual firms to improve
overall performance.

This study has been a general study on the Michigan vegetable industry.
One of the limitations of this study has been the inability to focus deeper into
specific issues related to specific crops. In a next phase, specific crop-by-crop
studies may be conducted using similar techniques, which would thus help in
overcoming this limitation.

6.5 Concluding Thoughts
Strategic analysis revealed the critical issues faced by the industry and

scenario analysis has exposed the industry’s increased risk and uncertainty. The

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industry will need to strengthen their position and increase their competitiveness
by adopting proactive strategies in order to effectively manage an uncertain
future. The Michigan vegetable industry is very challenged by its environment
and needs to take coordinated action if it is to meet these challenges. This study
has attempted to contribute constructively to the industry’s understanding of its

strategic position and options.

76

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